However, another axis of this nexus that has been largely neglected by civil society activists surfaced recently with the murder of Mumbai investigative crime reporter Jyotirmoy Dey. He was shot to death in broad daylight on a city street and his killing has been allegedly tied to the city’s “oil mafia.”

Remember Yashwant Sonawane? He was the additional collector of Malegaon in Maharashtra who earlier this year was doused with kerosene and burnt to death by members of the oil mafia when he had apparently caught one of them red-handed pilfering kerosene from a tanker.

This crucial axis is organized crime, loosely called mafias. The oil mafia is only one of many groups of criminals who operate in sectors as diverse as milk, sand, sandalwood, and of course mining, which has also been the news.

For our purposes, let’s focus on the oil mafia. Why does it exist and how does it make its money?

The simple answer is the large discrepancy in prices amongst petrol, diesel, and kerosene. While petrol prices have been freed up recently, diesel and kerosene prices are still controlled by the government. Kerosene is supplied by the government to households with incomes below the poverty line through the public distribution system at a fixed price well below its market price and below the prices of diesel and petrol. The mafia arbitrages these price differences to make a large and illegal profit estimated to be worth over $2 billion per year nationally.

This illegal arbitrage takes many forms, including stealing kerosene meant for government shops and selling it on the black market at a higher price; adding stolen kerosene to diesel and passing off the adulterated product as diesel; and mixing stolen kerosene with cheaper fuels and selling it illicitly as kerosene. So serious is the problem that according to a widely cited study, an estimated 38.6% of kerosene in the public system is diverted to the black market.

The solutions attempted by the government and state-owned oil companies include some futuristic ideas, such as using global positioning system sensors to track the movements of kerosene delivery tankers and “marking” kerosene with a dye that will reveal if it’s been adulterated. More old-fashioned methods such as locking the tankers with keys that are supposed to be copy-proof and greater monitoring of tankers when they are loaded and unloaded have also been tried.

Not surprisingly, these “solutions” haven’t put much of a dent in the illegal trade. As I noted in my most recent Economics Journal, proposed solutions to a problem need to tackle the root causes, and not merely the symptoms, if they are to have any hope of being successful.

The oil mafia exists because of artificial, government-mandated price differences, and solutions such as chemical markers or tracking sensors attack the symptoms and not the cause. Another recent study pointed out that such half measures are unlikely to be successful so long as the underlying incentives for the illegal activity don’t change.

A deeper question is this: why do kerosene subsidies even exist and who are they supposed to help?

They’re nominally targeted to the poor, as kerosene was traditionally their primary cooking fuel. However, as University of Pennsylvania political science professor Devesh Kapur has noted, less than 1% of rural households and less than 8% of urban households use kerosene as their principal cooking fuel. Clearly, the original rationale no longer makes sense.

Basic economics would suggest that the way to go is to eliminate the remaining price control on fuels and let the market determine the prices. Poor households could be assisted in purchasing fuel by direct cash transfers. Indeed, a proposal to replace the kerosene subsidy with cash transfers for the poor was part of this year’s budget, but has not yet been implemented. Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission, an economist himself, has also argued for freeing up the prices and removing the subsidies on fuel.

So if the current policy isn’t helping its intended beneficiaries and has spawned a huge oil mafia–to say nothing of its huge cost to the exchequer and damage to the environment from the burning of adulterated fuels, why does this policy still exist?

But if the poor don’t actually benefit much from the subsidy, does Mr. Reddy’s argument make sense? It does, but perhaps not in the sense he intended. The nexus amongst politicians, mafia, crooked cops and bureaucrats is in itself a powerful, albeit hidden, lobby in favor of the status quo.

This would suggest that real reform will only occur when the political will exists to break this nexus. If that will is mustered, we shouldn’t expect the mafia to disappear overnight, but one of its most profitable activities will certainly be eliminated.

A Jan Lokpal bill would not have saved the lives of Mr. Sonawane and Mr. Dey, but cutting off the economic legs from under organized crime may help prevent such tragedies in the future.

About India Real Time

India Real Time offers analysis and insights into the broad range of developments in business, markets, the economy, politics, culture, sports, and entertainment that take place every single day in the world’s largest democracy. Regular posts from Wall Street Journal and Dow Jones Newswires reporters around the country provide a unique take on the main stories in the news, shed light on what else mattered and why, and give global readers a snapshot of what Indians have been talking about all week. You can contact the editors at indiarealtime(at)wsj(dot)com.